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Yesterday saw the latest in a series of interviews on the Iain Dale show on LBC Radio by Ian McCafferty of the Bank of England. Actually it was the last by Ian as he is about to depart the Bank of England. Before I start I should point out that we were colleagues back in my time at Baring Securities which feels like a lifetime ago mostly because it is! His main claim to fame was declaring that the German Bundesbank would not do something at a meeting and then the door was opened by someone keen to tell the room some news which I am sure you have already guessed.

Moving forwards in time to yesterday Ian had more than a little trouble with the concept of full employment as he assured listeners that the UK was at full employment at the moment. This was really rather breathtaking as it showed a lack of understanding on two major levels. Firstly if we just stay with the unemployment rate those who read my update yesterday will be aware that Japan has seen an unemployment rate some 2% lower or nearly half ours. An odd thing to miss as our shared history involved specialising in Japanese economics and finance. Also it was a statement that on the face of it made no nod at all to the concept of underemployment where people have some work but not as much as they would like. So in his world both Japan and underemployment seemed not to exist.

Presumably Mr.McCafferty was trying to bolster the case for last week’s interest-rate rise in the UK which of course needs all the bolstering it can get but he ended up being challenged by the host Iain Dale. The response was a shift to claiming we are around the natural or equilibrium rate of unemployment but of course this led to another problem. On this road he ended up pointing out that the Bank of England has had more than a few of these but he did at least avoid a full confession that they started the game by signalling that a 7% unemployment rate was significant but now tell us that the equilibrium rate is 4.25%. Thus the reality is that they have chased the actual unemployment rate like a dog chases it tail although to be fair to dogs they usually tire of the game once the fun stops. Whereas should we live up to the song “Turning Japanese” the Bank of England will have chased the “equilibrium rate of unemployment” from if we are generous 6.5% to 2.5%.

House Prices

As you can imagine this subject came up and it was interesting to hear an explanation of UK house price rises omitting the role of the Bank of England. You might have thought that having gone to the effort of producing the bank subsidy called the Funding for Lending Scheme in the summer of 2012 and then produced research saying it had reduced mortgage rates by up to 2% that you might think it was a factor. This would be reinforced by the fact that it was in 2013 that house prices in the UK began to turn and head higher. There is also the Term Funding Scheme which began in August 2016 which amounted to some £127 billion of cheap liquidity ( 0.25% back then) for the banks which even the casual observer might think was associated with the record low mortgage interest-rates which were then seen.

This seems to be a new phase where the Bank of England sings along with Shaggy “It wasn’t me.” The absent-minded professor Ben Broadbent was on the case on the 23rd of July.

But it should be borne in mind when reading – as one often does – that QE has done little except boosted
prices of assets like shares and houses, or even led to a “boom” or “bubble” in those markets.

The research quoted was from colleagues of his who have voted for this QE and I am sure many of you would love to be judge and jury on your own actions! Later he tells us this about UK house prices.

But the latest figure is barely any higher than it was in the middle of the last decade.

So it is the same as the level that contributed to the crash? Not quite so good and whilst it may not be that much of an issue when your salary plus pension benefits total £356,000 many will note that real wages are 6% below their peak according to the official data.So house prices compared to wages are rather different.

Also there is this issue.

Broadly speaking I don’t think any of these things is true. It’s not new; it’s not exactly printing money; equity
and house prices are in real terms still comfortably below their pre-crisis levels; inequality hasn’t risen – nor,
according to the most detailed analysis available, did easier monetary policy have any net impact on it.

I guess he has never seen that bit in the film The Matrix where the Frenchman describes the role of cause and effect. Also on the subject of inequality I note that FT Alphaville has pointed out this.

In London and the South-East of England, this shift has been profound – real prices are nearly 30 per cent higher in London, and 10 per cent higher in the South-East and East.

Some house owners are indeed more equal than others it would appear. But this brings us back to Ian McCafferty who assured us on LBC that the ratio of house prices in London to the rest of the country “is now re-establishing itself at close to its more normal long-term level” . Is 30% higher the new “close to”?

Inevitably the issue of Brexit came up and sadly our intrepid policymaker seemed to struggle with both numbers and words in this regard. Here is the Reuters view on this.

“We are getting stories on (how) the numbers of French and German and other European bankers that are coming to London have fallen quite sharply over the last couple of years,” McCafferty said in a question-and-answer session on LBC radio.

You might think that he would know the numbers via contacting the banks rather than listening to “stories”. Also he had opened by saying there had been an “exodus” of such bankers which of course evokes the thought “movement of jah people” a la Bob Marley. The response from the host was that the number of bankers in the City had risen which then got the reply that the inflow had slowed which again is somewhat different to the initial claim. As this is an issue that is both polarised and political an independent ( his words not mine) should be ultra careful in this area rather than giving us vague rhetoric which falls apart at any challenge.

Oh and before we move on from housing there was this bit.

a number of those who are renting particularly those who work in the City.

Was he thinking of Governor Carney who of course got a £250,000 annual rent allowance?

Comment

There is much that is familiar here as we note that the Bank of England is looking to re-write history in its favour. There are two initial problems with this and the first is the moral hazard in you and your colleagues judging your own actions. On this road Napoleon could have written a counterfactual account of how his retreat from Moscow was a masterly example of the genre. Also there are clear contradictions in the story of which two are clear. The rise in asset prices seems able to boost the economy on the one hand but to have had no impact on inequality on the other. London house prices can have soared and become completely unaffordable in central London to all but the wealthiest and yet are close to normal long-term trends.

Only last week we were guided towards three interest-rate rises but now there seems only to be two.

Britain is “now at full employment” and so can expect “a couple more small interest rate rises” in the next two to three years to stop the economy from overheating, according to Bank of England policymaker Ian McCafferty. ( Daily Telegraph which failed to spot the full employment issue)

Maybe it is because they are only raising them so they can later cut them.

Higher interest rates will also give the Bank room to cut them once more if the economy hits a troubled spell in the years ahead.

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About the author

I am a freelance economist who studied at the London School of Economics. My speciality was (and still is) monetary economics. I worked in the City of London for several investment banks and then on my own account over a period of 15 years. After initially working in the government bond department at Phillips and Drew Ltd. I moved on into the derivatives arena with options of all types being a speciality. I never lost my specialisation in UK interest rates and also traded as a local on the London International Financial Futures Exchange where I mostly traded futures and options on future and present UK interest rates. So with my specialisations of monetary economics and konwledge of derivatives I have plenty of expertise to deploy on the financial and economic crisis which has unfolded in recent years.

I have also worked in Tokyo Japan again in the derivatives sphere and would particularly recommend Japanese food with a pork tonkatsu box lunch being one of my favourites. My name is Shaun Richards and as well as writing economics reports and analysis I also give speeches and lectures.Should one or all of these be of interest then please contact me via the contact details on this website.

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